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Despite need for fuel, some pipeline projects not viable

North Dakota officials have been touting pipelines as a way to reduce truck traffic and more safely ship oil to refineries, but two major Bakken pipeline proposals failed to move forward due because of a lack of interest from shippers.

Koch Pipeline Co. proposed the Dakota Express Pipeline to transport Bakken crude from western North Dakota to Illinois. It was expected to begin service in 2016 with an initial capacity of 250,000 barrels per day.

After conducting an “open season,” in which the pipeline company gauges interest from the industry, Koch recently abandoned its plan for the project.

“The Dakota Express project is no longer being pursued due to insufficient shipper interest,” said Jake Reint, director of public affairs for Koch Pipeline Co.

Reint declined to comment further.

Similarly, ONEOK Partners did not get sufficient long-term commitments for the Bakken Crude Express Pipeline proposed in 2012. The project would have transported up to 200,000 barrels per day from North Dakota to Cushing, Okla.

“At that time, rail was, and still is continuing to be, the viable option,” ONEOK spokesman Brad Borrer said Tuesday, adding that the company is still making significant natural gas investments in the Williston Basin.

Each project had more than double the capacity for Bakken crude than the Keystone XL Pipeline, which North Dakota’s congressional leaders continue to urge President Barack Obama to approve. The Keystone XL would have the capacity for 100,000 barrels a day of Bakken crude from a terminal in Baker, Mont. TransCanada Corp. has firm commitments for up to 65,000 barrels a day, according to a U.S. State Department report released last week.

Justin Kringstad, director of the North Dakota Pipeline Authority, said the timing of the Koch and ONEOK projects, uncertainty of the market and the flexibility that rail offers shippers likely contributed to those projects being abandoned.

“We’ve got very different pricing depending upon which corner of the U.S. you go to,” Kringstad said. “That’s caused a lot of uncertainty and likely what has caused folks not to sign up for projects like Koch and ONEOK.”

Sandy Fielden, managing director of energy analytics at consultant firm RBN Energy, said it may take at least three or four years for the market to adjust to the new production of light crude oil in the U.S. and for the price volatility to settle down.

“Over time, pipelines will get built where there is a consistent flow of crude,” Fielden said.

Shipping by rail often requires a one-year commitment and shippers can direct oil to where it will get the highest price, while pipelines typically require a 10-year commitment, Fielden said.

“They’ve got to justify the cost of building it, which is very, very high,” Fielden said of pipeline projects.

With North Dakota expected to surpass 1 million barrels of oil production per day this year, companies are continuing to monitor the long-term pipeline needs for North Dakota, Kringstad said.

“I would expect that with the amount of volume going forward, that we would see additional interest in new pipeline projects,” Kringstad said.

In addition to competition from rail, another challenge for the Koch project was competition with Enbridge’s proposed Sandpiper Pipeline, Fielden said.

Enbridge announced last November that Marathon Petroleum Corp. agreed to partner on the $2.6 billion project, agreeing to pay 37.5 percent of the project cost in exchange for a 27 percent interest in the company’s North Dakota system.

Sandpiper, which would bring Bakken crude to refineries in the U.S. and eastern Canada, is expected to have an initial capacity of 225,000 barrels per day to Clearbrook, Minn., and 375,000 barrels per day to Superior, Wis.

The North Dakota Public Service Commission will hold hearings on the application later this month.

Another reason the Koch proposal may have been become less attractive to shippers is that a second leg of pipeline that was planned to transport oil from Illinois to Louisiana failed to attract sufficient interest as well, Fielden said.